Heikin-Ashi – meaning and how to trade with it

June 24, 2013 11:24 am

Technical analysisIn trading, we need to be able to predict the direction of the market. Different traders do this using different methods but for most traders, technical analysis of the price chart is the easiest way.

Those familiar with the candlestick charts know that it is one of the best and fastest ways to understand the condition of the market.

Japanese traders tried to make the technical analysis and price prediction easier and faster. Heikin-Ashi chart, that came after the candlestick chart, is one of the several different achievements of Japanese traders. You can predict faster using the Heikin-Ashi charts. Furthermore, they are easier than candlestick charts to understand and trade.

Heikin-Ashi Chart: meaning and visualization

Heikin-Ashi chart looks like the candlestick chart, but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different from the candlestick chart.

In candlestick charts, each candlestick shows four different prices: Open, Close, High and Low price. Every single candlestick is independent from others and has no relation with the previous or next candlestick.

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On the opposite, Heikin-Ashi candles are calculated and plotted using some information from the previous candle:

1 Open price: the open price in a Heikin-Ashi candle is the average of the open and close of the previous candle.
2 Close price: the close price in a Heikin-Ashi candle is the average of open, close, high and low prices.
3 High price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the highest value.
4 Low price: the low price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the lowest value.

So the candles of Heikin-Ashi chart are related to each other because the open price of each candle should be calculated using the previous candle close and open prices, and also the high and low price of each candle is affected by the previous candle. That’s why a Heikin-Ashi chart is slower than a candlestick chart and its signals are delayed.

heikinashi

Advantages and disadvantages of the delay

This delay has made the Heikin-Ashi candle a good indicator for volatile currency pairs because it prevents us from rushing and making mistakes and trading against the market.

What we understood till now is that Heikin-Ashi chart is delayed and the candlestick chart is much faster. What is the point of using Heikin-Ashi if it is slower than candlestick chart? Because of the delay that the Heikin-Ashi chart has, it has less number of false signals and prevent us from making false decisions. On the other hand, Heikin-Ashi candles are easier to read because unlike the candlesticks they don’t have too many different patterns.

Different Candles in a Heikin-Ashi Chart:

1- Bullish candles:
When the market is Bullish, Heikin-Ashi candles have big bodies and long upper shadows but no lower shadow. Look at the big uptrend in the below chart. As you see almost all of the candles have big bodies, long upper shadows and no lower shadow.

2- Bearish Candles:
When the market is Bearish, Heikin-Ashi candles have big bodies and long lower shadows but no upper shadow. Look at the big downtrend in the below chart. As you see almost all of the candles have big bodies, long lower shadows and no upper shadow.

3- Reversal Candles:
Reversal candles in the Heikin-Ashi charts look like Doji candlesticks. They have no or very small bodies but long upper and lower shadows. Look at the reversal candles in the below chart:

Basic Usage of Heikin-Ashi charts

Some traders rely solely on Heikin-Ashi to trade. It is a good idea especially for those who are not patient and disciplined enough or those who lose because of entering too early and exiting too late. It helps you follow the trending markets, because it keeps you wait for a longer time, and then it lets you in when you are at the beginning of a strong trend.

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